What's Around the Quarter? | Stewardship Concepts Financial Advisors

Today's Friday post is different. Every quarter, I write a commentary for our clients. Here are some of the highlights:

Always A Student

I attended a tax summit conference in Arizona this past week. Tax experts put it on, especially for financial advisors. It was great information and fun to learn with other firms going the extra mile for their clients in tax and financial planning. We believe in the student mentality. Even though our team may have all the knowledge to do our job with excellence, it's important to learn, especially with tax planning. Legislation and rules are changing, and there are always better ways of executing what we know. My main three takeaways from the conference were strategies on estimated tax payments, using a 37-point checklist to review tax returns so nothing gets missed, and tips on filing form SSA44 to avoid Medicare premium increases. As a team, we are going above and beyond the requirements of maintaining our continuing education (CE) so you know you're receiving the best advice, strategies, and tax planning. If we don't know the answer, we will let you know and find the answer.

Performance (Surprise, surprise!)

3rd quarter of 2024 continued strong market returns against many analysts' forecasts. This year has reinforced the age-old wisdom about the inability to time the market. It's not about timing the market but the time you're in it. Looking at the market, we have continued to see overvaluation. First Trust has come up with a possible justification for its overvalued state. They like to use a formula to determine how the stock market is valued. Their Capitalization Profits Model takes the profits from the S&P 500 companies and uses current interest rates to see where the value of the stocks stack up historically. The higher the interest rates, the lower the stock price should be. The higher the profits, the higher the stock price. One flaw they recognized is that their profits were always pre-tax. The downside of using pre-tax profits is that their take-home money and capital used to expand the business and pay dividends was much more. In 2018, the top tax rate of a corporation's profits was cut from 35% to 21%. They determined that their model was skewed by 8% after recognizing this. When taking this into account, the market is more reasonably valued. What will happen when corporate tax rates return to their original levels? With one look at the federal budget situation, it's easy to predict that those rates will increase in future years.

Investing In A World of Overvaluation

You may ask, "So what does overvaluation practically mean as we invest?" As we manage portfolios, we recognize, with every passing day, that there will be a recession and a correction. There always has been and will be. Recessions and "crashes" are a part of a healthy free market economy. Nobody knows the exact timing. There are extended periods in history where overvaluation can persist for years. Analysts have been predicting a recession for the past 2 years. But because we know it will come, we build our portfolios with this in mind. There is a silver lining; after the pullback, there is a recovery. The market continues to recover and make all-time highs. That's why we continually invest with a long-term horizon and stay invested. The biggest mistake I see people make is liquidating and trying to time the market. There will always be fear and greed in our stock market, and they drive the markets and push us through these cycles.

Where We Stand

We've been able to lock in higher interest rates on the fixed-income portion of the portfolio and hedge large caps with buffered ETFs—specifically hedging large-cap growth where we see the most overvaluation. We'll have to see what this next quarter and year have in store. The Fed is doing a complicated dance, and they are doing well so far. Inflation has come down, and the labor market has been seeing some cracks, but recent data today shows that it may be stronger than the Fed assumed. We'll see if the Fed is less likely to cut rates going forward with recent robust labor market data. Luckily, inflation is coming down. The real pickle happens when the Fed can't cut rates because inflation and unemployment are rising. At that point, they don't have any more tricks up their sleeve to help our economy, and we'll have something called stagflation, where there is no economic growth and high inflation.

Set up a meeting with one of our Spokane financial advisors.

We have availability. If you know someone who can use our help, please share our website, where they can make a no-cost, no-commitment discovery call.